Breaking down barriers: UK-India trade ties

While 2019 was a difficult year for the Indian economy, the government is taking steps to stimulate its growth. Could a deeper trade relationship be beneficial to both India and the UK?

David Sapsted

17 December 2019

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The news from New Delhi at the end of November was unwelcome, though not unexpected: official figures showed that India’s economic growth rate had hit a new low of 4.5% in the second quarter of the 2019-20 financial year.Although the year-on-year increase in GDP would still have been beyond the wildest dreams of most Western nations, it was not the news Prime Minister Narendra Modi’s government needed at the end of a difficult year for the economy, which has seen it record its weakest performance in more than six years.Inevitably, perhaps, the decline from 8% little more than a year earlier to a figure below the symbolically important target of 5%, was blamed by ministers on the global slowdown. But there has been a slew of other reasons, from weakening domestic demand to shrinking factory output; plunging car sales to a slump in both exports and investments.

Fighting the economic slowdown in India

Throughout 2019, the government took action to try to stimulate the economy. The Reserve Bank of India cut interest rates five times during the year to their lowest since 2009 – and more easing is expected. Mr Modi spearheaded a drive over fiscal reforms that introduced a $20 billion cut in corporate taxes. Additionally, a special real-estate fund was created, banks were merged and the biggest privatisation drive in more than a decade was launched.Yet things have not markedly improved and economists are wondering what further scope for executive action exists. “Domestic demand is displaying chronic weakness, with an apparent credit crunch afflicting wide swathes of the economy,” says Taimur Baig, chief economist at DBS Group Holdings in Singapore. “Production and sales are under pressure, and public spending is running out of room due to poor tax collection.”

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Finance Minister Nirmala Sitharaman accepts the economy is faltering, but insists the government will make policy changes as required. “Every step being taken is in the interest ofthe country,” she told the upper house of parliament. “Looking at the economy in discerning view, you see that growth may have come down, but it is not recession yet; it won’t be recession ever.”Yet Indranil Pan, chief economist at IDFC First Bank in Mumbai, is not convinced there are any quick-fix solutions. “The nature of the slowdown is broad-based, with consumption, as well as investment-oriented sectors, feeling the pain. The continuing poor domestic sentiment, along with the lack of any demand uptake globally would ensure that any recovery process would only be gradual.”

Barriers to deepening trade with India

Even so, India’s ranking in the World Bank’s ‘Ease of Doing Business’ has improved markedly over recent years, rising from 142nd in 2014 to 63rd now, and Mr Modi wants the nation to be a $5 trillion economy by 2025 - something that would require GDP to grow by 8% a year.A ‘white paper’ report published in November 2019 by the Confederation of British Industry (CBI) and global professional services firm Ernst and Young (EY) said the UK was “a natural partner” in helping India achieve this ambition, pointing out that the two nations have been among the top five investors in each other’s economies since 2010, with trade increasing by 27% between 2015-2018.“However, barriers to deepening trade ties remain, from tax and the complexity of regulations to contract and data protection issues,” said the report, which set out three principles that it suggested could guide the Indian government’s approach to further business reform.

What would India need to do to encourage deeper trade ties?

First, it said the stable majority and strong political capital enjoyed by the government had created an opportunity to build consensus on further reforms to improve the ease of doing business. “For example, beginning consultation with business and state governments on land and labour – building on the model used during the design and implementation of the Goods and Services Tax (GST) – would be welcomed by UK businesses,” it said.Second, it urged the government to prioritise reforms that have a multiplier effect and that would have a big impact on specific indicators in the Ease of Doing Business Rankings. “The administrative burden of compliance could be significantly reduced. The adoption of self and third-party certification or deemed approvals in low-risk industries should be a rule across sectors. This would confine inspections by the government to high-risk categories of industries.”

What are additional focus points for business in India?

The report said the Indian government could undertake a risk-mapping exercise for compliance in crosscutting areas such as pollution control approvals, labour regulations and metrology legislation. “This would reduce the compliance burden in low- and medium-risk industries and free government resources to concentrate inspections on high risk, harmful industries.”Third, the report called for the harmonisation of domestic standards with international standards to reduce technical barriers to trade. “Ease of doing business issues arise when national technical standards become barriers to trade. In some Indian industries, such as in the manufacture of boiler components, standards mandated by the government regulator differ from the international market.”The report said that standards restricted imports, which, in turn, might serve to make the Indian domestic manufacturing sector less competitive and less able to emerge as a strong player in global value chains.“For India to transform itself into a truly global investment destination, it would be best to harmonise domestic standards and processes with international ones.”Shehla Hasan, country director of CBI India, comments, “This white paper is by no means exhaustive. It seeks to support the commendable work already done by the government of India on improving the ease of doing business in the country. We have tried to keep our focus sector-agnostic, by capturing macro-trends across sectors, which if resolved, would cascade improvements across the economy.“Tackling the barriers that we identify here won’t just benefit UK companies, but will benefit all companies operating in India, both Indian and foreign, and will benefit the whole Indian economy.”

The UK and India have a "crucial" relationship

Crispin Simon, the UK’s trade commissioner for South Asia, described the UK-India relationship as “crucial” and one that is continuing to go from strength to strength. “Businesses are the engine rooms of economic growth, job creation and prosperity. A stable regulatory regime and ‘ease’ of business environment are vital to SMEs and start-ups: giving them the certainty they need to succeed and grow.“As the UK and Indian governments work towards these mutual goals, it is important that we also look to provide the right frameworks to ensure our businesses are good employers and responsible corporate citizens: nurturing their ability to drive innovation, create skilled jobs, and boost economic growth.“As Prime Minister Modi has said – if we can make doing business easier, we will also make people’s living standards better. As governments, that is our common aim and I am confident we can achieve this together.”But Kaushik Basu, a professor of international studies and economics at Cornell University and former chief economic adviser to the Indian government, argues that the sort of drop-in investment that India is now experiencing is usually connected to a lack of trust in the present and the near future.“When businesses worry about a country’s policy environment, they hesitate to sink money into it. A government’s heavy-handed interference in the market – such as the Modi administration’s decision to ban some paper currency in late 2016 – or general fractiousness, in politics or within a bureaucracy, can hurt confidence in the economy,” he wrote in the New York Times.“Economists don’t much like to admit this, but a country’s economic performance depends as much on its politics as on its economic policies. The fundamentals of India’s economy remain strong. The current slowdown is mostly collateral damage, the result of an erosion of trust caused by the country’s drift toward illiberalism. India can boost its economy again by reclaiming and building on its progressive heritage.”

Economic growth on the horizon for India?

And the latest GDP figures show that the economy needs boosting. The State Bank of India (SBI), the country’s largest public sector bank, blamed the slowdown on “low automobile sales, deceleration in air traffic movements, flattening of core sector growth and declining investment in construction and infrastructure”. The SBI has now revised its growth projection for the 2019-20 financial year from 6.1% to even 5%.However, Capital Economics opined that the latest figures should mark the low point of economic growth. “There are early signs that services activity, consumer spending and credit growth picked up at the start of the (October-December) quarter.” Mr Modi and many businesses in both India and elsewhere will hope they are right.